Managing for Growth: Fiscal Prudence, Competitive Taxation and Smarter Spending

October 21, 2003

Madame Chair, Honourable Members, on behalf of the Canadian Council of Chief Executives, thank you for the opportunity to offer our thoughts on the fiscal challenges facing the federal government in the next budget and beyond.

Smart fiscal policy matters because it drives both growth in jobs and incomes and the capacity of governments to provide high quality public services. How the federal government manages taxpayers’ money has a real impact on how effective it will be in improving the quality of life of Canadians.

The Council this year has prepared a substantial written submission. Many of its 15 specific recommendations reflect comments we have made in the past, especially with respect to the importance of prudent fiscal management and the use of tax policy to create real competitive advantages for Canada.

The Council’s central concern today, however, is the explosive growth of federal spending. I therefore would like to focus my remarks this morning on a proposal for a new, rigorous and practical process for spending review and reallocation.

The recent pace of growth in federal spending simply cannot be sustained. The 11.5 percent increase in total program spending in 2002/03 flowed in part from higher health transfers, but over the past four years, direct spending by federal departments has actually been rising even faster than transfers to the provinces.

From fiscal 1999/2000 to the current year, direct program spending is projected to rise by 34 percent. That’s an increase of more than a third in just four years. And even though the unemployment rate is low, spending through the Employment Insurance system is rising faster still, up 39 percent in four years.

It is clearly nonsense to suggest that tax cuts have stripped the federal treasury bare and bled essential programs. Federal spending is at a record level — and despite the cuts in personal and corporate tax rates, so is tax revenue.

Revenue has been growing even where tax rates have been cut. Both personal and corporate income tax revenues this year are forecast to be 10 percent higher than four years ago. And revenue from the GST, where the rate has not been cut, will jump by 30 percent.

Spending, though, has been growing more than twice as fast as tax revenue. If the government wants to keep meeting new or growing needs in areas such as health care and defence — and do it without undermining the economic growth that has kept the money rolling in over the past five years — it has to get serious about spending review.

Both the current and previous finance ministers have recognized the need for an ongoing review process, but progress to date is not encouraging. The budget of February 2003 launched a token exercise to identify $1 billion in reallocations by May, and even this took twice as long as planned. What will it take to make a serious review process work?

In the Council’s view, four elements are essential: an overall cap on spending growth; a multilevel process of review; creation of an annual reallocation fund equal to 5 percent of direct program spending; and greater transparency and accountability in the spending review process. Let me explain.

1. An overall spending cap. Like every Canadian family, governments have to make choices. If your child needs braces, that new car may have to wait. Governments cannot simply tell taxpayers to give them a raise just because they want to spend more money.




The first requirement for effective spending review is therefore some upper limit on overall spending growth. One option, a cap of inflation plus population growth, would essentially freeze real per capita spending. The Council would be prepared to support such a cap, but recognizes that it might prove overly restrictive in practice.




The Council is therefore recommending a more flexible formula, nominal growth in Gross Domestic Product minus one percent (GDP-1). Governments should never grow faster than the economy that supports them, but GDP-1 recognizes that as their real incomes rise, Canadians may want to enjoy some of the benefits of growth in the form of public goods — better health care, schools, roads and parks — rather than only through private consumption.




2. Multilevel spending review. To do a thorough job of constantly improving the value the country receives for each tax dollar spent, the government has to review its spending on three distinct levels: program, policy and function.




At the program level, managers need to ask every year: Is this program doing what it is supposed to do? Could it be run better?




The broader policies that drive programs need to be reviewed every five years. Have needs changed? Are there any new ideas or new tools for meeting these needs more effectively?




And at least once every 10 years, government needs to review cross-cutting functions, such as how it attracts and develops employees and how it buys goods and services.




Three priorities for review at the policy level are Employment Insurance, defence and Aboriginal affairs, if only because they involve the largest amounts of spending and some of the most disappointing results. At the functional level, the most immediate priority would appear to be government procurement, where helicopters and advertising contracts come to mind.




3. The 5 percent solution. What gets measured, gets done. This is why the Council is calling for creation of an annual reallocation pool equal to 5 percent of direct program spending. Even though this would exclude transfers to the provinces, Employment Insurance benefits and old-age pensions, a 5 percent pool would generate potential reallocations of more than $3 billion each year.




Each senior executive in the public service would be required to identify the least effective 5 percent of the spending within his or her area of responsibility. The deputy minister and minister would consider this advice in determining the 5 percent of the department’s budget that should be put on the table for discussion at the Cabinet level.




Some of the contributions to the reallocation pool might, on final analysis, be left untouched. The rest would either be reshuffled within departments or distributed between departments.




4. Improving transparency and accountability. The 5 percent solution is about making public servants and ministers accountable. This goes beyond poring over their expense accounts. It pushes them to create value, not just eliminate waste. Executives who can’t tell ministers where to find better value don’t deserve bonuses. And ministers who aren’t willing to pull the plug on programs that aren’t working should not expect taxpayers to give them any more money for their new projects.




Two other changes in spending management practices would make these reviews more effective. First, the government should make the review process more transparent, by engaging outside experts from the private, nonprofit and academic sectors to work with public servants in identifying options for reallocation.




Second, the government needs an effective internal champion, a body that can provide analytical support for departmental, policy and functional reviews and that can challenge the cost-effectiveness of existing programs and new proposals. The Treasury Board once had such a role and reviving and reinforcing this responsibility could make it the driving force for a new culture of constant review within the federal public service.

The goal of all this is not to slash spending. Overall, spending will continue to rise. But programs and policies that are not working well or no longer meet the real needs of Canadians should be the first place the government turns to find the money to pay for new initiatives. If ministers and their deputies are unable to tell taxpayers what is producing good value and what is not, why should they be trusted to spend even more?

In making this proposal today, the Council is suggesting that this Committee look beyond the next budget and make your influence felt in improving the way federal spending is managed. The government is collecting more tax money than ever before, and we are counting on you to ensure that this money achieves as much of an impact as possible in improving the lives of Canadians.

Thank you again for the opportunity to appear before you this morning. This concludes my opening remarks, and I would of course welcome any questions you may have.